As the power industry strives to improve access to electricity to underserved consumers, trends within other markets such as mining and industrial production are expected to have an impact on these efforts.
In South Africa, local steel price fluctuations brought on by extreme volatility of the primary pricing will influence the price of energy and power infrastructure, including transmission towers and distribution poles.
Similarly the increase in cobalt, used in manufacturing of lithium ion batteries will drive the cost of electric vehicles and battery storage up.
“An unstable pricing dispensation is therefore having a pervasively negative effect, and is going to drive the whole industry in the wrong direction,” states Warne Rippon, executive director of steel major, Allied Steelrode.
Today, we analyse the trends influencing steel price fluctuations and the possible effect they might have on other sectors.
The hidden impact of steel price fluctuations
At present, companies in the local steel industry are finding the market very challenging. According to industry sources, much of this can be attributed to the extreme volatility of the primary pricing, explains Rippon.
“This level of volatility poses an enormous and very urgent challenge to the entire sector.”
These price fluctuations result in a knock-on effect, which is very hard to contend with.
“If we are experiencing this, then our downstream customers must be even more adversely affected.”
“What the market desperately needs at this point is a more stable and reality-based pricing system going forward. Quoting customers accurately – even three months ahead – is extremely difficult when you have this level of pricing volatility to contend with,” he adds.
Until March 2006, Allied Steelrode used import parity pricing – where the price of steel was set based on what it would have cost if the product had been imported – as is common in most global steel markets today.
However, an international “basket of prices” was introduced, reportedly to enhance transparency in the pricing system and allow for the introduction of a major rebate system. This pricing method was calculated by taking an average of domestic mill prices (excluding freight), for steel in China, Germany, Russia and the US.
The bottom line is that for Allied Steelrode and its downstream customers the effect of price fluctuations is potentially severe. “Unfortunately, if there is not some rationalisation of pricing levels, we – along with many other companies in the industry – will be forced to import more of our steel requirements,” says Rippon reluctantly.
Import market looking attractive
As pointed out above, due to the current worsening volatility and unpredictability of the prices of steel from the local raw steel mill, industry is not looking to purchase locally, but are looking to import more.
According to figures from Customs and Excise, there has been a steep increase of steel since 2010, when imports of primary carbon and alloy steel products totalled 662.6 thousand tons. Currently, some 965.6 thousand tons were imported in 2017.
“What tends to exacerbate the situation is that there is very little in the way of downstream price protection and volume metrics in the current steel pricing equation,” Rippon states, explaining that irrespective of the volumes of steel purchased – for example 25 or 800 coils at a time – the price remains the same – with no discounts or customer loyalty programme in place – so industry is effectively being de-incentivised.
Rippon suggests that “in spite of the recent political uncertainty and the weak economy, we therefore urgently need to have a new steel industry pricing dispensation.”
“In terms of the imports, local steel companies would rather not wait for their supplies to come over the water, and have to manage the attendant logistical challenges accordingly. On the other hand, Chinese and European-sourced steel performs and competes with local steel exceptionally well – both financially and in terms of quality.
“In our opinion, locally produced steel is not meeting industry’s requirements from either a pricing or a quality point of view – something that is critically affecting the local steel sector as a whole,” he comments.
International influence on local steel market
Many major decisions about the South African steel sector are made overseas, says Rippon, adding: “These stakeholders are removed from the reality of doing business locally, and also do not have the interests of the local steel industry at heart.”
He also points out that pricing protection seems to only be between the primary producer and government, and does not extend to protect or assist the downstream industry.
“The current predicament that the South African steel industry is in – caused by this pricing issue – ironically goes against the whole steel industry value-adding product paradigm – not to mention the ‘proudly South African’ manufacturing initiative.
“Ultimately this pricing issue is not encouraging – nor indeed fostering – local steel sector growth. If the local industry ultimately flounders as a result of the pricing volatility and South African manufacturers cannot produce locally, then they cannot successfully export either – and the economy as a whole loses out,” he concludes.